UNDERSTANDING THE HOME MORTGAGE INTEREST DEDUCTION

imagesI want to take the opportunity to provide readers with a framework upon which to assess issues being discussed in Congress relative to the proposed tax legislation. I can’t believe the amount of misinformation being passed that goes unchallenged by a media that’s become lethargic or flat out lazy. So, this is my shot at it and I hope it helps you make up your own mind.

Home Owner A buys a home selling at $450,000 and after a 20% down payment of $90,000, he finances $360,000 with a 30 year mortgage at a fixed interest rate of 4.5%. Home Owner A is in a 33% federal tax bracket and 3% state and local tax, so the home owner’s  combined tax rate is 36%.

  • The Home Owner’s Monthly Mortgage Payment: $1,824.07
  • First Year’s Interest Payments: $16,081.18
  • Combined State and Federal Tax Savings Resulting from the interest deduction: $7,085.22
  • Over the life of the loan, Home Owner A pays a total of: $656,665.20

Home Owner B buys the same house as Home Owner A but because the home mortgage interest deduction has been eliminated, the purchase price is 11.11% lower (this is on the conservative side of a national estimate ranging from 11.8% to 25% based on test markets). Therefore, the purchase price is $400,000 and after a 20% down payment of $80,000, the financed amount is $320,000

  • The Home Owner’s Monthly Mortgage Payment: $1,621.39
  • First Year’s Interest Payments: $14,249.38
  • Combined State and Federal Tax Savings Resulting from the interest deduction: $0
  • Over the life of the loan, Home Owner A pays a total of: $ 583,700.40

Home Owner B has a monthly payment that is $202.68 per month less than Home Owner A, this is real cash flow  of $2432.16 annually that B doesn’t have to wait to see until the end of the tax year. Over the life of the loan, Home Owner B also saves $72,964.80 over Home Owner A. In evaluating the mortgage interest deduction question it’s also very important to recognize that the value of the interest deduction to the taxpayer decreases dramatically after the 17th year into your 30 yr. loan.

The home mortgage interest deduction benefits realtors and home builders by artificially supporting home prices making homes more expensive to buy.

Updated:

I neglected to comment on the usual argument that eliminating the home mortgage interest deduction will destroy home prices. Lower housing prices will increase demand which will support housing prices.

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